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India’s story of post-independence economic growth has been uneven, although it can be broadly characterized by gradual reform. Over time, these reforms have better integrated India into the global economy and improved its resilience to market shocks.

Today, reform efforts focused on promoting the formalization and digitalization of the Indian economy, as well as an expansion of the country’s manufacturing sector and promotion of foreign direct investment, have the potential to improve economic efficiency and allow for the further expansion of India’s growth horizon.

In this paper, we provide an overview of India’s story of post-independence economic growth and reform, and then shift our focus to the key factors which we believe will be important for unlocking India’s future potential.

Key takeaways

  • India’s economy is of global importance. It is already the fifth-largest economy in the world and a key contributor to global economic growth, yet there is still considerable untapped potential. It has a large and young population, and an open and democratic political system. Although it has more than a sixth of the world’s population, India currently produces only 7% of the world’s output.
  • India’s outlook has improved, benefiting in particular from recent policy reforms, which have helped the country address some long-standing macroeconomic vulnerabilities, including high inflation and large current account and fiscal deficits. In addition, we expect that India will benefit significantly from global reshoring initiatives, including “China plus one” policies. Real gross domestic product (GDP) growth in the past decade averaged 5.8%, and the International Monetary Fund (IMF) forecasts growth of 6.3% for the next few years.
  • In our view, India’s growth potential remains high as the country will continue to enjoy a large demographic dividend. However, we expect policymaking challenges to stay visible given the size and diversity of the economy.
  • Capitalizing on India’s demographic advantages will require labor market reforms, measures to improve education and skills, and significantly improving women’s participation in the economy. Constraints on investment and infrastructure pose a challenge, while India’s services-oriented growth path will take it into unfamiliar territory.
  • The outlook for India therefore depends on the country’s ability to address a number of challenges and strengthen the structural shifts already underway to fulfil its potential.

Global Macro Shifts is a research-based briefing on global economies featuring the analysis and views of Dr. Michael Hasenstab and senior members of Templeton Global Macro (TGM). Dr. Hasenstab and his team manage Templeton’s global bond strategies, including unconstrained fixed income, currency and global macro. This economics team, trained in some of the leading universities in the world, integrates global macroeconomic analysis with in-depth country research to help identify long-term imbalances that translate to investment opportunities.

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